24 February 2014
  • Construction mortgages are available for the building of:
    • Condominiums and townhouses
    • Commercial centres
    • Manufacturing / industrial buildings
    • Apartment buildings
    • Hotels and motels
    • Residential homes
    • Recreation sites
  • Funding is usually 75% Loan to Cost, not loan to value as in other mortgage funding solutions
  • Developer / property owner contribute their capital first
  • Construction financing, also known as project financing, refers to the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure.
  • Project debt and equity used to finance the project are paid back from the cash flow generated by the project. The project's assets, rights, and interests are held as secondary security or collateral.
  • Construction mortgages provide funds monthly to match the invoices received for work completed on the building project.
  • Construction financing or project financing is especially attractive to the private sector because major projects can be funded off from a balance sheet.
  • Obtaining a commercial mortgage or construction financing can be challenging, even though a building or project is tangible and has a certain value.
  • Besides understanding all aspects of the asset, a lender must have confidence in the servicing of the debt and the strength of the company making the commitment.
  • There are different types of lenders offering varied terms and conditions, and willing to take on more or less risk. To achieve the lowest cost with the least amount of personal risk, you must provide the lender with a thorough understanding of all aspects of the building or project, the history of the company and principals behind the project, the cash flow timeline and potential, and all of the potential risks.
  • CAP Rate is an important consideration (NOI or Annual Cash Flow / Total Cost or Value of Property)
  • Revenue earned from the rental property must cover the operating expenses of the building and mortgage payments
  • Income generated from the property must be incurred from legal suites meeting permissible qualifications for the region
  • Mortgage insurance may be required
  • Vacancy rate must be factored into projections
  • Income to consider: Upper Rent, Lower Rent, Garage, Laundry, Other
  • Sample operating expenses to consider: Advertising, Insurance, Garbage collection, Reserve fund, Gas, Power (electrical), Water & Sewer, Taxes, Salary, Caretaker, Property manager, Repairs & maintenance
  • Raw land is more risky to finance than land with buildings. On its own it is more difficult to get adequate cash flow to service the debt.
  • Due to the higher risk, loan to value ratios (LTV - the amount that a lender will finance) will often be less. Some private lenders will go as high as 75% if they are comfortable with the principal for the project as well as the outside debt servicing capabilities. But most banks will only provide 50% LTV.
  • The intended purpose of the raw land, the viability of the intended use, the time frame for development, plus other factors determine the level of interest of a funder and possible the rate and loan to value that might be considered.
  • Other sources of income are usually requested to prove that the debt secured by the land can be serviced. Some funders will take an interest reserve from the loan that they provide, however this type of lender will often charge much higher rates too.
  • If the raw land is part of a construction project some lenders may provide funding at the same ratio as the balance of the construction financing – often 75%. However in many instances the equity in the land is a material portion of the equity for balance of the construction project.
  • The purchase of an office tower or professional building is a large undertaking. It can be a great investment opportunity and a continual, growing income source. Office, professional and medical centres generally only appreciate in value, and can provide sound, reliable revenue.
  • Examine the building's past records thoroughly to ensure that all costs are known and reported appropriately.
  • Ensure the building is appraised and inspected by reputable professionals. Incorporate any repairs or renovations that need to be completed into your budget, as well as long-term property and parking lot maintenance, landscaping, insurance and property tax.
  • Ensure the income can service the debt with appropriate coverage, the lease terms are appropriate for the lenders and the term you are seeking, or the vacancy isn’t higher than other buildings in the area.
  • Ensure you have the knowledge, time and discipline on your team to manage the property appropriately, or consider getting a professional property manager to assist you.
  • Pay attention to the caliber of tenants as this could impact a lenders interest in providing funding.
  • Lenders will review leases and will complete their own assessment of the property's revenue
  • Lenders will be looking for a strong, reliable and diverse tenant base that matches the terms of the mortgage
  • Location, condition and detailed access information (roads, parking, loading zones) regarding the property will need to be provided
  • Credit history of both borrowers and tenants are important if the project is or becomes an income property.
  • The type of work that was done on the site or will be done there is very important to lenders. Environmental concerns have continued to elevate. Other concerns might include work that might be subject to bylaw infractions.
  • Funding requirements are similar to office buildings however industrial properties typically have fewer tenants
  • Examples:
    • Warehouse
    • Storage Unit
    • Industrial Space
    • Workshop
    • Manufacturing site
    • Plant
  • Lower loan to value ratios are typically available for hotels and motels. Alcohol and Video Lottery Terminals can often make it difficult to get premium rates.
  • Accurate proforma financials are very important
  • Room rental not bar or restaurant is a priority for some lenders in determining the debt service coverage required
  • Being located in a major centre will improve the rate and the likelihood of funding
  • Property condition is an important consideration
  • If the start-up hotel/motel is not part of a recognized accommodation chain, securing financing through a traditional bank or financial institution may be difficult
  • Financing can sometimes be obtained from syndicated non-bank lenders and real estate financiers at lower rates than some private commercials lenders